How Venture Capital Can Ruin Your Company

Believe it’s the key to growth and success? Not even close. Take it from OpenView, we’re a VC.

When companies look for funding they’re thinking of scalability and increased market share, and dreaming of all of the prospects and customers who will be banging down their door. After all, the only thing that’s standing in their way of being successful is a healthy dose of funding. Right?

Sure, I suppose that can be the case — maybe I can simply hand over a briefcase full of cash to the local high school track & field team and they’ll call and thank me when they get to the Olympics.

Believe it or not, what I’m advising is that venture capital investment isn’t for everyone. In fact, if your business isn’t really ready for it, outside investment can ruin everything — all the promise and equity you’ve worked so hard to develop.

The problem is that some founders mistakenly view venture capital as a means to an end. They see dollar signs and begin believing that a significant cash infusion will fix all of their problems, big and small. As a result, those companies are often drawn to big money investors who offer absurdly high valuations. That’s a mistake because in reality, venture capital should simply be fuel for a company’s engine, helping it propel the entire operation toward specific landmarks or goals.

Thinking about raising funding? Read these posts from the OpenView Blog first:

You can pour all the gas you want into your car, but if the battery’s dead or the transmission’s busted, you’re not going anywhere. In other words, there are many things that a cash infusion won’t fix, but that an investment that’s accompanied by a true partnership — one that’s not only banking on your company’s success, but is also actively involved in it — will.

If you’re thinking about accepting a venture capital firm’s term sheet you have to be sure it’s bringing more than just cash to the table. Otherwise this new “partnership” could leave you high and dry, struggling to live up to some incredibly high expectations and pressured to discover your way all on your own. Here are three questions to consider before you sign:

1) Is the investor aligned with your business?

Choosing the right backers for your company is critical. One of the worst things you can do is choose a VC on brand name alone, assuming that it possesses the expertise, industry insight, and market knowledge you’re going to need as your business scales.

Don’t be afraid to turn the spotlight on potential investors and ask them some fairly specific questions. Does the potential investor have the right experience and savvy for your industry? If so, can they provide strategic insight and guidance? How will they add value to your board of directors? If you don’t have good answers to these questions, you should think twice about those investors.

2) What’s the investor’s history?

Venture capitalists tend to have pretty high hopes for their investments, often shooting for a return of five to 10 times their original investment. Some VCs, however, are quick to cut bait if they believe a company has little chance of offering that return. That’s damaging for several reasons, not the least of which being the hit your company’s reputation will take when it tries to raise its next round of financing. When a VC gives up on you, it’s not exactly a stamp of approval for future rounds.

Your goal should be to target VCs with a strong track record of mentorship and support. Money is great, but if your investors lack familiarity with your industry and don’t share your long-term goals it can create a high-pressure, high-friction situation that hinders the company’s progress and decreases its likelihood of success.

3) Is your company really ready for outside investment?

As my colleague George Roberts wrote in his blog, it might sound unusual for a VC to tell a startup founder or CEO that they shouldn’t be raising growth capital, but we do it all the time. Ultimately, your business should only raise venture capital if it has reached these milestones:

You’re growing at a rate that’s in line with or ahead of similar sized companies in your market

Too many entrepreneurs assume that capital is the key to building and expanding their business. The truth is if you don’t have an operational structure in place first, any additional funds will likely be misused and poorly appropriated.

Ultimately, venture capital should only be used to build upon what you’ve already created. Cash, after all, can’t magically make you more capital efficient or turn your below average salespeople into sales superstars.

So, if your company lacks some of the characteristics I listed above, or you can’t find a partner who truly aligns with your goals, it might be time to step on the brakes and really consider your investment needs and options. You might be surprised to find out that you’re better off bootstrapping and staying away from a venture capital investment altogether.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.